The euro has pulled off weekly highs versus the dollar but is manging to remain above US$1.11 on Wednesday.
The euro continues to trace movements in the pound, albeit in a less volatile manner. In the absence of other catalysts, euro investors are also focusing on Brexit.
On Tuesday, in a historical night of voting, Parliament backed Prime Minister Boris Johnson’s Brexit deal, although rejected his timetable. The results effectively ensure that Brexit won’t happen by the end of this month.
Downing Street is now split over how to proceed. One option would be to attempt to pass the Brexit deal on a slower timetable. The second option would be to seek a fresh mandate from the British electorate.
The strategy adopted will most likely depend on the length of time that the EU decide to grant the Brexit extension. A shorter extension will leave no time for an election. A longer extension would permit the UK public to return to the polls.
Brexit uncertainty is weighing on demand for the euro. This is because a Brexit deal would be beneficial for eurozone economies.
Investors will turn their attention to eurozone consumer confidence figures due today. The release could drag the euro lower as analysts predict a deterioration in sentiment across the bloc.
Dollar Investors Look To Tomorrow’s Durable Goods Orders
Dollar strength was unaffected by weaker existing home sales in the previous session. Homes sales declined by -2.2%.
The dollar is holding its ground this week after selling off over 1% versus the euro across the previous week. The strong decline in the dollar came following a week of soft data, causing investors to ramp up expectations that the Fed will cut interest rates when it meets later this month. According to the CME Fedwatch tool, investors are pricing in a 93.5% probability of a rate cut at 30th October FOMC.
| Why do interest rate cuts drag on a currency’s value? |
| Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available as the demand of that currency declines, dragging the value lower. |
With no high impacting US data to digest, investors will turn their attention to tomorrow’s durable goods order. Analysts are expecting durable goods orders to have declined -0.2% month on moth in September. A soft reading points to a less confident consumer. This is bad news for the US economy which is so dependent on the consumer. A weak reading could weigh on the US dollar.
| What do these figures mean? |
| When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.
For example, it could be written: 1 EUR = 1.12829 USD Here, €1 is equivalent to approximately $1.13. This specifically measures the euro’s worth against the dollar. If the U.S. dollar amount increases in this pairing, it’s positive for the euro. Or, if you were looking at it the other way around: 1 USD = 0.88789 EUR In this example, $1 is equivalent to approximately €0.89. This measures the U.S. dollar’s worth versus the euro. If the euro number gets larger, it’s good news for the dollar. |
